When comparing the economies of different countries, one of the most common methods is to use “purchasing power parity.” Purchasing power parity (PPP) compares international economies by standardizing the prices within a "basket of goods”. In other words, PPP accounts for the differences in standards of living (such as the different costs of a carton of milk) when comparing countries' production. Taking it one step further, our new visualization looks at the GDP of countries around the world in terms of PPP. In this chart, we use current international dollars, which has the same purchasing power as the dollar has in the United States.

Measuring GDP by PPP takes into account the cost of living around the world, rather than relying on market exchange rates to compare the economies of different countries.

In 2018, the world economy by PPP was $136.48 trillion.

Asian countries represent more than 40% of the world’s GDP by PPP.

The U.S. and China represent a third of the world’s GDP by PPP.

The information from this visualization comes from the World Bank, and the most recent numbers are from 2018. The size of each country in the visualization is proportional to its relative GDP by purchasing power parity. The countries are also color-coded by continent to illustrate the geographic distribution of the world’s production. All values are expressed in U.S. dollars.

Last month, we published a visualization that illustrated the world’s economy by GDP in current U.S. dollars (GDP that does not account for cost of living and uses market exchange rates to compare different countries’ outputs). You’ll notice there are a few differences between the visualization showing the world economy by nominal GDP (right visualization) and the world economy at PPP (left visualization). Notably, the U.S. has the largest share of the world’s GDP overall, but China has the largest share of GDP at PPP.

The World Bank data also shows that the GDP at PPP in the U.S. has grown every year since the Great Recession. However, after ten years of expansion, economic growth in the U.S. is finally slowing. But some think that the job growth is still enough to retain economic stability and continue to increase GDP.

Similarly, China’s economic slowdown has been noted internationally, especially its decrease in exports. China’s Central Bank has taken action by reducing its reserve requirement ratio in order to encourage more lending and kickstart more production. More signs of a global economic recession are showing, as the economic performance of countries such as Japan and India have also failed to impress. The global economy is still growing for now, but these trends could be a harbinger for changes ahead.

Did anything surprise you about the differences between GDP and GDP at PPP around the world? Please let us know in the comments.

Why do we care about Housing?

Property is the most expensive item most Americans will ever purchase. So, we will sacrifice a lot of additional spending to keep a roof over our heads. Observing the housing market is an excellent gauge of consumer confidence and financial health. It is integrated into nearly every economic sector and makes up a significant chunk of GDP (15% of GDP). The construction of new houses is, surprisingly, a small portion of the housing market, 3-5% of GDP. Rent and mortgage payments, then, make up 12-13% of GDP, as it is the most significant yearly expense of most households.

The 2008 Financial Crisis is unique because it involved the destruction of one of the United States’ most resilient industries. Neither the dot-com crash nor the 1997 Asian crisis dented the housing market. Usually, when home prices go up, people feel better off and feel more confident. Likewise, when house prices go down, people are more likely to cut down on spending and forego making personal investments. Home prices grew steadily from 1990 to Q1/2007 and, with them, people were looking for ways to make extra cash with the equity in their homes. So, refinance applications soared leading up to the crisis. Consumer confidence drove high borrowing and refinancing but adjustable-rate mortgages undermined the financial benefit and came back to bite owners (Indicated by those ominous black bars in Figure 1).

What goes up must come down

Funny enough, with home prices increasing steadily for over 10-years, people forget that whatever goes up must eventually come down. Maybe when investors are investing more in deteriorating mortgages, they cross their fingers and hope for the best. Regardless, these entrenched expectations of housing appreciation met low-interest rates and financial innovation to push home prices up at an accelerated rate after 2003. So, with a little financial invention, subprime and non-prime mortgage origination jumped in 2004, and the share of junk mortgages in mortgage-backed securities increased until it reached 80% in 2005 and 2006.

Home prices grew outside the United States, but it was the financial innovators who “built an inverted pyramid of leverage on the narrow fulcrum of ongoing domestic home-price appreciation” (Obstfeld and Rogoff).

Six million Americans lost homes during the Great Recession, and it takes a long time to rebuild that credit shock. As these Americans reenter the market, their wages have barely kept up with inflation and increased competition, from Millennials, is crowding the market.

Look at Where We Are

This month, August, the average rate on a 30-year fixed loan hit a 3-year low, 3.6%. Refinancing applications are up 12% at the beginning of August. Both metrics indicate a healthy housing industry and expectations that the good times will keep on rolling. Yet, while the situation is very similar to 2007, there isn’t the same level of risk. The weaknesses are more nuanced, and the links which make the housing sector a sound economic indicator are deteriorating.

There will not be a mortgage crisis anytime soon because new home buyers, millennials, are not traditional consumers. Millennials value flexibility, they marry later, and debt binds them more than any other generation. So, the industry will not have the gas to spin out of control. Millennials will reach financial maturity having witnessed the economic crisis affect loved ones, and that risk aversion is tough to shake – an availability heuristic.

Investors are starting to make up a higher percentage of home sales – at an all-time high and concentrated in lower-end markets. Private equity firms, like Blackstone Group Inc., bought loads of foreclosed properties after the crash and rented them back to the disgraced former owners. Investors concentrate purchases in high-growth areas, and these areas see less demand and slower price growth compared to regions without property investors. So, this investor activity may give additional stability to the market, if properly leveraged – albeit it creates problems for renters unable to buy their own home.

No equity in a college degree

Not only is debt a problem, post-college wages are persistently stagnant and the rise in contract labor are challenges for financial planning. Homes are 39% more expensive than 40 years ago and, despite low interest rates, buyers are priced out of rising houses because incomes have not increased with the price of houses. The mortgage crisis of 2006 seems to be impossible to repeat because people can’t afford homes or must save to reduce debt – making investing in mortgage-backed financial instruments more secure.

Low mortgage rates and high employment should make a healthy housing market, but the opposite is most likely the case. Entry-level homes are in short supply, as shown in Figure 2, because of competition from Millennials and investors burned by 2008 foreclosures, which have now rebuilt their credit. A repeat of the mortgage crisis is unlikely mainly because of restrictions on financial instruments and lending. The housing market, though, shows how wage stagnancy and household debt remain barriers to the pursuit of a culturally-iconic American investment.

Marketplace analogized the likelihood of another recession as rolling a 6-sided die – eventually, the wrong number will come up. Economists suggest a 1-in-3 chance that the U.S. economy will shrink next year. Sure, another recession will happen eventually, but the devastating effect of the last financial crisis has led us to expect the next recession to be just as bad. This is not necessarily the case, and there is little evidence to suggest recessions match the magnitude of the expansion period. Recessions have a history of varying durations and employment severity (Figure 3).

The leveraging instruments that kicked the housing market into overdrive are not present today. But that doesn’t mean that every debt market is free from such systemic risk.In Part 1, I touched briefly upon the corporate debt crisis, and Part 3 of Recession Deja Vu will continue this risk narrative. You can follow this series and learn about our Financial Planning Software on our blog, investingcounterpoint.com, and don’t forget to signup for our newsletter.

Ranking the Economic Health of Every U.S. State in 2019

The United States economy is on the verge of its longest economic expansion on record, but appears to be headed for a slowdown. So, what’s next for the United States economy? In this article we blend several key economic indicators to gauge the current health of each state as the country heads into uncertain economic times.

Six out of ten Americans are expecting a recession in the next year, along with three out of four economists in the next two

Job growth is slowing across the nation along with modest wage increases

Western states and the District of Columbia lead states in economic performance

Alaska, Rhode Island and southern states among the worst states economically

For this visualization we create a radar chart for each state to compare the following economic statistics as compiled from the Bureau of Labor Statistics, the Census Bureau and the Bureau of Economic Analysis: Wage growth, unemployment, job growth, GDP per capita, GDP growth and average weekly wages, adjusted by state purchasing power parity. We then derive a z-score for each indicator and blend the z-scores to calculate a total score for each state. To read more about how z-scores work, check out this guide.

Top 5 Best Economic Performing States

1. District of Columbia 2. Washington 3. Utah 4. Colorado 5. Nevada

Top 5 Worst Economic Performing States

1. Alaska 2. Rhode Island 3. Mississippi 4. Maryland 5. Louisiana

Much of the present uncertainty about the U.S. economy comes on the heels of the trade war with China. Economic growth is heading to 2%, compared to 3% at the start of the year and over 4% last year. On top of that, the last job updates showed mixed signals. Nonfarm payrolls increased by just 130,000 in August, versus Wall Street estimates for 150,000. 25,000 of these positions came from temporary Census employment. On the other hand, average hourly earnings increased by 0.4% in August and 3.2% for the year, better than expected.

Despite that silver lining, Americans appear worried about their country’s economic well-being, with six out of ten expecting a recession in the next year. Their sentiment echos economists, three out of four in a recent survey predicted a U.S. recession in the next two years

All that being said, some states are in a better financial state than others. In particular, Washington State has the fastest economic growth of any state and even surpassed Massachusetts to become one of the country’s ten largest economies. Other states ranking high on our charts also come from the West -- Utah, Colorado and Nevada are among some of the fastest-growing populations in the country.

Among poorly-performing states, Alaska comes in first. Earlier we found that Alaska residents hold the highest credit card balance per capita, and is also one of the most expensive states to live in. It shares both of these qualities with the second worst state, Rhode Island.

Where does your state place in our rankings? What surprises you about the data? Leave your thoughts in the comments and share with your friends.

The World's Pharma Trade: Which Countries Buy & Sell the Most Drugs?

The pharmaceutical industry is incredibly valuable and is continuing to grow. But just how much of the world’s imports and exports involve pharmaceuticals? To understand the impact of the pharmaceutical industry on the world’s economy, we created two visualizations to demonstrate pharmaceutical imports and exports by country in 2018.

The United States is, by far, the world’s biggest importer of pharmaceuticals at $99.7 billion.

As the opioid crisis in the United States carries on, pharmaceutical companies are being scrutinized, as was demonstrated in the Johnson and Johnson settlement.

Despite scrutiny, the pharmaceutical industry is continuing to grow at a rapid rate.

Pharmaceutical companies are being forced to pay hefty fines for their role in the opioid epidemic.

To create our visualizations, we pulled data from the World Trade Organization (WTO) on pharmaceutical imports and exports throughout the world in 2018. Using this data, we constructed two visualizations to portray the world’s largest exporters and importers of pharmaceuticals around the world. Each country’s pharmaceutical trade is represented by a pill. The larger the pill, the higher the value of exports or imports.

Though many people around the world are concerned about the growing demand for pharmaceuticals, this demand is fueling the growth of these massive pharmaceutical companies. As such, the industry is likely to continue playing a major role in the global economy in the coming years.

We all know the pharmaceutical industry has a major impact on the global economy. By analyzing our visualizations, we can get an even better understanding of how Big Pharma affects countries around the world.

Do you think we need more regulations on pharmaceutical companies? Why do you think pharmaceutical trade is dominated by the U.S. and Europe? Let us know in the comments.

As the U.S. continues to impose tariffs on goods from China, and vice versa, both countries are raising the stakes of the ongoing trade war. The new 15% tariff on Chinese goods just kicked in, and Asian markets are already feeling the effects. But the U.S. economy is also affected by these ever-escalating tariffs. Our newest visualization takes a closer look at how much each state would be affected by export tariffs imposed by China.

Throughout the trade war from the past year, the U.S. imposed $250 billion in tariffs on imported Chinese products. China retaliated with $110 billion in tariffs against American exports.

In absolute numbers, states on the West Coast, Gulf Coast, and Mid-Atlantic region stand to lose the most money as a result of these export tariffs. By contrast, states in the Midwest and Great Plains stand to lose the least amount of money.

Some state economies rely more on exports than others. For example, exports comprise 26.7% of Louisiana’s economy, compared to only 0.7% of Hawaii’s economy.

According to the U.S. Chamber of Commerce, half of all manufacturing jobs in the U.S. are dependent on exports, and one in three acres of American farmland is used for selling agricultural products to other countries.

The data from this visualization comes from a few different sources. We used calculations from the U.S. Chamber of Commerce to show the possible cost of tariffs, the Bureau of Economic Analysis to determine each state’s GDP, and the International Trade Commission to find the value of each state’s exports. In the map above, the color of each state represents the impact that export tariffs could have on the state, with lighter shades of pink representing lower impact and darker shades of red or brown representing greater impact. In addition, we used yellow circles to illustrate how much each state’s economy relies on exports; larger circles correspond to a higher percentage of exports as a percentage of GDP.

The effect of this new chapter of the trade war is, as usual, spilling over to more markets and commodities, such as oil and Big Tech. The tariffs will affect more than just the large markets. In addition, consumers will note the effect of the new tariffs, since many everyday products will increase in price. Economists predict that American households will spend an extra $1,000 a year as a result of these tariffs.

The U.S. and China have agreed to hold high-level talks in October to negotiate better economic conditions. This announcement is already having a positive impact on the stock market, but the question of whether or not tariffs will actually be reduced is still up in the air.

What do you think about the effect of tariffs on the U.S. economy? Please let us know in the comments.

It’s no secret that $1 now will get you less than it would 100 years ago, but just how much has the purchasing power of the U.S. Dollar decreased over the years? To illustrate this, we created a visualization that demonstrates the rise and fall of the dollar since 1913. Using this graphic, we can see how inflation and changes in the Consumer Price Index have decreased the dollar’s purchasing power over the last century.

$100 in 1913 would only be worth about $3.87 today.

While the purchasing power of the dollar has gone up and down since 1913, it has never surpassed the purchasing power it had in 1913.

The purchasing power of U.S. citizens has always topped the charts, but that could be changing in the future.

To create our visualization, we used data from the Bureau of Labor Statistics’ CPI Inflation Calculator. This calculator uses the Consumer Price Index for All Urban Consumers, which represents the changes in prices for consumer goods and services purchased by urban households.

By examining this data we can see how the purchasing power, or the total amount of goods and services that can be bought with one dollar, has changed since 1913. Additionally, we can see how recessions and major economic events impact our purchasing power.

What is $100 worth in 1913 over time?

Though there are outliers, the purchasing power of the dollar has steadily decreased since 1913. This is due to inflation and the continued increase of the Consumer Price Index over the years. As demonstrated by the data, dollar purchasing power has a negative correlation with the CPI. As the CPI increases, purchasing power of the dollar decreases over time.

Inflation is the constant rise in the prices of consumer goods and services over the years. As these prices continue to increase, the total amount of goods and services that can be purchased with a single dollar decreases.

Typically, sustained inflation occurs when the world’s money supply outperforms economic growth, which is why many people suggest that the world’s central banks must coordinate to maintain economic stability. This isn’t necessarily a bad thing. Controlled inflation provides stable growth environment in asset prices. This increases the value of homes and other real assets.

Recessions and major economic events can also affect inflation and the CPI. During a recession, the CPI often falls or increases at a slower rate due to the decreased demand for consumer goods and services.

By taking a look at our informative visualization, we can see how inflation and the increase in the Consumer Price Index have impacted our purchasing power over the years.

What do you think of this phenomenon? Is inflation necessary for economic growth? Let us know in the comments.

The Euro and U.S. Dollar make up over 80% of the world’s currency reserves.

Despite being a large part of global trade, the Chinese Renminbi makes up less than 2% of global currency reserves.

To find the top reserve currencies in the world, we pulled the latest data from the International Monetary Fund (IMF). This data is from the first quarter of 2019. This data accounts for the currency composition of all official foreign exchange reserves. Using this data, we created a helpful chart which can be used to easily identify the most powerful reserve currencies in the world as of 2019. Keep in mind that this data does not reflect unallocated reserves.

The World’s Top Reserve Currencies in 2019

Reserve currencies play an incredibly important role in the world economy. Not only do these currencies affect the international economy, but they play an important role in the value of each country’s national currency. As of 2019, the U.S. Dollar, Euro, and Japanese Yen are the most prominent currencies in the world with the U.S. Dollar leading the pack by a fair margin. Currently, around $580 billion U.S. Dollars are used internationally, 90% of forex trading involves U.S. bills, and about 40% of the globe’s debt is issued in this currency. While some countries have called for the establishment of a singular global currency for stability purposes, there doesn’t seem to be any imminent plans to do so.

Reserve currencies run the world’s economy. By taking a look at our visualization, we can see which currencies are the most abundant and have the most influence on the global economy. Do you expect the U.S. Dollar to retain its dominance in the future? Is a global currency a good idea? Let us know in the comments.

International trade has been in the news lately, with a growing standoff between not just the United States and China, but even the U.S. and Europe. The focus of these headlines is usually on trade in agriculture and physical goods, but trade in financial services matters too, and has its own looming issues.

Total global exports in financial services was $489.8 billion in 2018, up 5.6% from the prior year.

The United States and United Kingdom together make up 40% of the world’s financial services exports.

U.S. exports of financial services was at a record-high $113 billion.

The United Kingdom’s access to European Union financial markets after Brexit is uncertain.

In this post we look at the World Trade Organization (WTO)’s 2018 report on financial services exports. To find the data on the WTO dashboard, make sure to set “Type of trade” to “Trade in commercial services” and “Commodity/sector” to “financial services.” Each country is drawn to scale on the map based on the size of its financial services exports. A darker shade of green also indicates more financial exports.

Together, the U.S. and the European Union (EU) make up almost exactly half of the world’s financial services exports. It’s an impressive statistic, but one that’s about to be made less so: the European Union figure includes the United Kingdom (UK), which at some point will be leaving the EU. Traditionally a banking and finance powerhouse, the UK makes up over 17% of the planet’s financial services exports. Recently, the UK financial sector has benefitted from easy exposure to European markets as part of the so-called European single market. With Brexit, the exact trading status between the UK and EU remains unclear, but the consensus is that this will negatively impact the UK financial sector. The consulting firm PricewaterhouseCoopers suggests that the UK financial market will lose between 7 and 12 billion British pounds due to Brexit in 2020.

The UK isn’t the only financial market bracing for hits in 2019: the yield curve for US Treasury bonds recently inverted -- a traditional harbinger for recession. On top of that, the amount of negative-yielding debt now equals nearly a third of tradeable bonds worldwide, according to J.P. Morgan. These signs of a global slowdown are likely to accompany a reduced demand in financial services.

On what terms will the UK leave the EU, and how will this affect its access to financial markets? Is the U.S. economy headed for recession? What would that mean for financial exports? Let us know your thoughts in the comments.

Since the 1940s, housing prices have soared to new levels. According to the U.S. Census Bureau, the median home value in the U.S. was $30,600 in 1940 (adjusted for inflation). By 2017, that number was $193,500. Not surprisingly, as housing prices increase, so does the amount of mortgage debt that a homebuyer must take on in order to afford a home. Our new visualization takes a closer look at how mortgage debt in the U.S. has changed over time.

Outstanding mortgage debt is 284 times greater in 2018 than it was in 1949.

Total mortgage debt first exceeded $1 trillion in 1977.

From 2008 to 2012, during the height of the Great Recession, total mortgage debt in the U.S. actually decreased every year.

As a percentage, the largest increase in mortgage debt year-over-year occurred from 1949 to 1950, when mortgage debt increased by more than 50%.

The visualization is based on data from the Federal Reserve, which lists the amount of outstanding mortgage debt in the U.S. since 1949. The chart above represents a timeline of mortgage debt, shown in circle form. The top of the circle starts with 1949, and the years progress in a clockwise direction until 2018, the most recent full year. For each year, the amount of outstanding mortgage debt is represented by smaller, stacked dots, with each dot representing $400 billion. To give a more complete picture of how much mortgage debt has been accruing over the years, the dots are color-coded. Years with yellow dots mean that the total mortgage debt is under $1 trillion, while orange dots represent $1 trillion to $10 trillion and the red dots represent more than $10 trillion in mortgage debt.

Even though the mortgage debt is the highest in history, long-term interest rates are close to historical lows. Prominent economists, like Paul Krugman, have warned about the current real estate market status. Mortgage demand, despite record-low rates, seems unable to grow since home prices are still out of reach for many Americans.

While mortgage rates in the U.S. are low, other countries like Denmark are giving homebuyers even more of a boost. A Danish bank is offering the world’s first negative interest rate, at -0.5% a year, meaning the mortgage holders will pay back a lower amount than they took out to purchase a home. It will be interesting to see how this affects the Danish real estate market in the long run.

Learn more about the homebuying process with our cost guides for home loans or home refinancing. Please let us know in the comments what you think about these new developments in the real estate market.

Exports are a major aspect of international trade. Countries around the world can bolster their economies by selling their resources and consumer goods to other nations around the world. Developing and developed countries both export products around the globe.

But which countries lead the global economy in exports? We constructed a helpful visualization to find out which countries are the largest exporters in the world. You may be surprised at the results.

China is still, by far, the largest exporter in the world. The country exported a total of $2.5 trillion worth of goods in 2018.

World’s Smallest Exporters

Perhaps the most notable insight from this data is how much the global export industry is dominated by just a few countries. China is, by far, the largest exporter in the world, beating the United States by about $800 billion. China is, by far, the largest exporter in the world, beating the United States by about $800 billion. China’s top exports include machinery, technology, furniture, plastics, and vehicles. Furthermore, the top three countries combined (China, the United States, and Germany) exported more than the next seven countries combined.

Meanwhile, at the bottom of the list, countries like Niue and Palau are only exporting a few million dollars worth of goods per year. Lastly, it’s important to consider the potential impact of the U.S. and China trade war on the global economy. Not only do China and the U.S. stand to lose a lot from this trade war, but so could other countries that rely on these countries as their major trade partners.

While a small handful of countries dominate the global export industry, every country in the world relies on exports to drive their economies. Our visualization helps us see which countries lead the global economy and just how much they are exporting on an annual basis.

How do you think these numbers will be affected by the China and U.S. trade war? Let us know in the comments in the comments.